History repeating

As the US stock market, particularly the broader S&P 500, approaches its yearly highs, according to Morgan Stanley, it is following a similar path to 2019, which was one of the best years for the S&P 500 in the last decade.

Investors gained a 29% profit that year. Current data indicates that it is nearing the end of a bearish cycle. A similar period occurred in 2019 when the Federal Reserve paused and subsequently lowered interest rates. This decision led to a sustained rally in the stock market, primarily driven by multiples rather than company profits. If not for the crisis of 2020 triggered by the coronavirus pandemic, who knows where this would have led?

This year, the S&P 500 has already grown by 19%. Investors completely disregarded the Federal Reserve’s statements about the possibility of a recession in the first half of the year, and it turns out they were right. The latest data shows that the US economy is performing better than expected and coping well with high interest rates, raising hopes for a soft landing next year. Drawing parallels with 2019 suggests even greater growth potential for the index, as stated in the analytical note.

However, the Federal Reserve lowered interest rates for a significant part of 2019, contributing to market growth. A similar scenario may repeat in 2024 when, having achieved their inflation targets, and to avoid pushing the economy into a real recession, the regulator might actively start reducing rates.

Last week, Federal Reserve representatives raised borrowing costs again. Although Chairman Jerome Powell pointed out encouraging signs that the rate increases were working to curb price pressures, he reiterated that policymakers had a long way to go to bring inflation back to the 2% target level.

Earlier this year, Morgan Stanley leaned toward a more bearish scenario, suggesting that the risk of a recession was much higher than before. Now the company’s strategists are considering possibilities where the US economy could enter a new upswing cycle even without a technical recession. This makes upcoming macroeconomic data critical for the Federal Reserve, which wants to halt its tight policy cycle but currently sees no opportunity to do so.

Regarding the S&P 500 index, demand for the trading instrument remains strong. Bulls have a chance to continue the uptrend, but they need to stay above $4,582. From this level, they may push the price higher to $4,609. Bulls also should maintain control over $4,637, as it would strengthen the bullish market. However, if there is a decline due to reduced risk appetite, bulls should protect $4,582. Piercing this level, the index may plummet to $4,557 and $4,539.

The material has been provided by InstaForex Company – www.instaforex.com